Monday, 31 December 2018

Today’s post is a guest post from
Teny Kuti, a first-year student in Aston University’s Law School. The post
discusses the various effects of the forthcoming HS2 high-speed rail link, as
well as some of the potential consequences moving forward. Please follow Teny
via Twitter here, and his own blog The Whole Spectrum
for an interesting take on a number of different issues, ranging from politics
to business.

Frequently described as the most substantial
rail project ever built in the UK set to open in 2026, High speed
rail 2 will form a high-speed link between Birmingham and London, reducing the
travel time to 49 minutes. However, the project has never been shy of controversy.
Since the HS2 received Government approval in 2012, it has seen strong
opposition from those who would lose their homes on the current plans and
indeed, HS2 Ltd has claimed that 1,740 buildings would be destroyed by the rail
line, with nearly 900 being homes. Now with the recent developments such as the
Chairman of the project resigning and claims that the
cost has been vastly underestimated from £56bn to potentially
£100bn, it becomes pertinent to discuss whether HS2 will have a positive or
negative impact on the country.

The rail line intends to link both
London and Birmingham, and then a phase 2 extension is planned to connect Leeds
and Manchester to the line. This could address many long running problems such
as the high house prices in London caused by a dense population living there.
The ability to travel from Birmingham to London in under an hour may allow for
people who work in London to seek cheaper housing in Birmingham without having
to suffer a 2-hour commute. As living in Birmingham becomes a more viable
option, this would reduce demand for homes in London thus causing prices to
decline, theoretically. Having an easy connection to London may also result in
more Businesses following in the footsteps of HSBC and relocating
to Birmingham, or potentially creating smaller satellite offices in the
city. However, this could result in Birmingham eventually sharing similar
issues currently facing London. As seen when
Deutsche Bank moved to Birmingham in 2014 the demand for homes increased
by two-thirds. This far exceeded the supply of houses and thus prices went up.
Should other high value firms follow Deutsche Bank and make the move to
Birmingham, it may just inherit the problems they were trying to escape.

The physical construction of the
rail line would result in jobs being created as the Department for Transport
claims that construction
of the project will create 25,000 jobs in addition to 100,000 people
working at the new stations and 3,000 jobs operating the trains themselves.
Naturally, these jobs would benefit the country as it allows people to earn a
wage and thus spend it in the country, improving the economy. However, the
construction of the line would also destroy 985 businesses that are
currently on the planned route of the line and thus, the people employed there
would lose their jobs. Specifically, HS2 Ltd claimed that 19,590 jobs would
need to be relocated but for those who were already earning a lower income in a
job that was integral to the location such as a farmhand, finding a new job may
be difficult. Although, the project is creating several times more jobs than it
is causing to relocate, thusly the rail line would have a positive impact on
the job market, as well as the benefits of a better-connected country.

The financial cost of the project
has recently been found to be much more than was previously stated, calling
into question how cost effective it currently is. The rail line was approved on
a budget of £56bn but it has recently been leaked that it may
increase to over £100bn due to underestimating how much the contractors
would need to be paid to complete the project in a timely manner. This has
renewed questions of whether this money could be spent on something more
effective. Many have criticised the project as being a way to circumvent the
existing problems in the transport network. The money used on HS2 could also be
used to fix potholes, upgrade the existing train services, or expand bike and
bus services. These projects would not require the compulsory purchase of land,
nor would it destroy people’s homes and businesses. HS2 Ltd has also faced numerous
claims of undervaluing the land that they need to buy resulting in families
and Businesses being forced to move out, but without enough compensation from
the Government to relocate. Not only is this damaging to the individuals it
directly affects, but it also proliferates an anti-Government sentiment which conflicts
with the sense of interconnected national pride they hope to achieve with HS2.

The environmental impact is also worthy
of discussion as with any train, the transport is more environmentally friendly
if it is replacing transport by car given that one train can take hundreds of
people. However, High
Speed Rail itself is not significantly better for the Environment
than a normal train. Indeed, the methods used to construct the rail line are
certainly not environmentally friendly and thusly, it is possible that HS2 may
do more damage to the Environment when considering the wildlife disrupted and
trees cut down. Given that the primary users of HS2 would likely be using a
normal train otherwise, the environmental impact of HS2 is likely to be
negative but to a minimal degree, largely due to the harm done during
construction.

HS2 is going to have a profound far
reaching effect on the UK ranging from the country wide economy to a family of
farmers in Buckinghamshire. The rail line seems to have a net positive impact
on the economy if it produces the amount of jobs they expect, this should
offset the amount of people who have lost their jobs or need to relocate. The
rail may also relieve some of the pressure on London as the hub of the largest
service firms. Should these firms choose to move to Birmingham and eventually
to Leeds and Manchester, this would benefit the economies of these individual
cities while decreasing the price of housing in London, but also increasing the
price in these various cities. When the UK gains the benefit of this economic
increase is dependent on whether the project remains on budget, though this
seems unlikely and the potential for it to go over budget is supported by the
resignation of its Chairman in early December. Ultimately, HS2 should have a
positive effect on the economy, but a negative effect on individuals and small
business owners who are an obstruction to the most substantial rail project
ever built.

Tuesday, 11 December 2018

Back
in August 2017 we looked at the concept of the ‘private finance initiative’,
and also the differences between ‘public private partnerships’ and ‘private
finance initiatives’, which
has also been dissected in the literature. We looked at the issue of Carillion
and the aspects that underpinned its high-profile collapse. However, for this
post, the question will be whether the recent developments at Interserve, the
massive provider of public services in the UK, is part of a general trend or an
indication of a fundamental flaw within the model that is being adopted
currently.

One reason why they may have done this is because, for the
Government, it is not a ‘risk’ at all. Perhaps, for this Government in
particular, it is an ideological necessity that Interserve is supported, and
that Carillion was supported even in the face of negative financial
declarations. In the literature it has been identified that such partnerships
between Government and Business are essentially a ‘brand
for how governments want their interaction with business and society viewed,
or, alternatively, how they want the role of government in the economy viewed’,
which clearly hints at an ideological approach. The development of this form of
societal investment is, seemingly closely tied to the development of
globalisation, with this approach being witnessed around the world and with
companies spreading their reach to meet that demand (Interserve is a good
example of this). Yet, we have spoken here in Financial Regulation Matters many times about viewing global
developments in a cyclical manner, so with that being said what may be the
message from this uptake of public and private partnerships? The first thing to
note is that the symbiotic relationship that exists between certain political
outlooks and big business creates results, but that it is difficult to see how
they are long-term in nature. The appalling lack of oversight on instances such
as Carillion show us that the maintaining
such a relationship, for the benefit of the public, is not really a concern –
the real concern is developing tangible and public examples of development in
order to provide support for the model; for example, pictures in the media of
half-built hospitals do no good whatsoever to the development of the
partnership, which as we know is underpinned by public money. The second thing
to note is that this narrative of needing
big business to flourish has become so entrenched, it is difficult to foresee
any other model taking hold. It is not suggested here that another model should
be adopted, nor that it would be any better necessarily, but it is clear that
this current model of cartelisation on the back of public funds does not work,
and is societally damaging – so, what does this mean?

One thing that it may mean, thinking of the UK in particular,
is that suggestions that a number of key infrastructure areas will be
nationalised once Labour get into power, if they do, is easier said than done.
Nationalisation has taken place before, but this current era is dominated by
the entrenchment of a narrative (aided by the development of the internet and
social media etc.), which means change would have to be incremental if it were
to be successful. It also means that the Conservative Party, for however long
they remain in power, must continue
to support companies like Interserve, because it is their ideological position that is on the line. The relationship between
big business and government must work if the Conservative Party is to remain in
power and relevant, and as such it is anticipated that only an absolute and
sudden collapse would see Interserve vanish. The concept of ‘too big to fail’
is commonplace, but the connection of certain fields to politics must not be
ignored. In a sense, Interserve is too politically important to fail, as it represents
an ideology that has taken years to construct and implement. Yet, we are in an
era where continuing corporate failures are being contextualised by societal
instability, so the question may be how long will the public sit by and allow
their money to be utilised as a fundamental
safety net, especially when they do not directly see the financial benefit of
doing so?

Friday, 7 December 2018

As is the remit of Financial
Regulation Matters, it should not be surprising that analysing financial
regulators is of key concern for this blog. In doing that, however, we get to
see the diverging experiences of a financial regulator, and how differing
approaches yield very different results. We have examined a number of
regulators throughout the years in this blog, and two have factored heavily in
our analyses. Today, we revisit the two particular stories which have evolved
recently and left the respective regulators facing a number of criticisms.

The SFO’s Pursuit of
Tesco Directors Fails

We examined the case of the Serious Fraud Office (SFO)
launching proceedings against three Tesco Executives back in February. Then we
discussed how the SFO were alleging that fraud
by abuse of position, and false accounting were the crimes of Carl Rogberg,
John Scouler, and Christopher Bush. That post asked whether the SFO would
continue in their pursuit, and shortly afterwards it was confirmed that they
would be. For the past two months the trial against Scouler and Bush had been
ongoing until this week when, at the behest of Sir John Royce, the trial was
dismissed on account of the Court of Appeal agreeing with Sir Royce that there
was no
case to answer. Whereas a regulator cannot be expected to succeed in every
regulatory action it takes, the views of Sir Royce were scathing: ‘I
conclude in certain areas – one in particular – the prosecution case was so
weak it should not be left for a Jury’s consideration’. According to Sir
Royce, the major weakness was of the failure to prove knowledge on the part of
the defendants, whom he said were of ‘impeccable character’. The Financial Times reports that the SFO are
now considering whether to push ahead with their prosecution of the remaining defendant
Carl Rogberg.

The SFO is a regulator that is constantly
in the political crosshairs, and this failure, when conjoined with their recent
failure to bring charges against Barclays over their Qatar-based financial
crisis-era funding, is a particularly dreadful start for the new head of
the SFO, Lisa
Osofsky. However, the failures raise a number of important issues that are
worth addressing. Those issues revolve around the standard of proof required
for prosecution, which is central to the failure of the Tesco case. Osofsky
herself noted this year that the current standard of identifying a ‘controlling
mind’ when prosecuting was too high of a standard in relation to corporate
forms. Instead, she argued that an introduction of the concept of a ‘failure
to prevent’ would be more suitable i.e. a person or company being held to
account if it could not prove that it [they] had not done enough to prevent a
crime. Here, then, is where it becomes very difficult to foresee any meaningful
change, and it is questionable whether that change should occur. If the three
executives are guilty, then the need to identify a controlling mind is
fundamentally in the favour of the corporate form, which can protect
individuals (despite of the measures available to ‘lift
the corporate veil’). If the three are guilty, then the £10 million spent
by the SFO will have been nowhere near enough to obtain information that
surpasses such a high burden of proof. However, if the opposing model was
adopted, and a failure to prevent model was in place, then there is the
likelihood that three people who boast clean track records would have been
indicted. It is difficult to foresee any change in this arena anyway, as we
currently reside in an incredibly pro-business environment that will naturally
require only the very highest standard of proof in order to prosecute corporate
individuals. For the SFO, the issue remains that whilst their successes are
notable (their DPA prosecution of Rolls Royce for corruption and fraud stands
out), their failures are mounting and are incredibly visible. Osofsky has a
decision to make as to what form the SFO adopts on her watch, as her
predecessor’s approach garnered results but ultimately could not save the
regulator from sitting directly within the political crosshairs of the
Conservative Party. The future of the SFO will likely be dictated by her
decision in the coming months.

It will be interesting to see what the decision is for this
particular application. Mitchell is related to the group that recently won a
settlement from RBS, rumoured
to be around £200 million, and as such demonstrates the understanding that
a settlement was always unlikely to be the end of the matter. Whilst it is
difficult to predict the outcome of the application, a successful outcome will
likely spell trouble for Andrew Bailey, the current Head of the FCA. It has
already been stated in the business media that ‘Andrew Bailey must pay the
price for FCA failures’, and if this application is successful then those calls
will grow even louder. If the Review then finds that the FCA did have options
available to them, the obvious of question will be ‘why were they not used?’
Potentially, and unfortunately for Bailey, if that question is officially asked
there cannot be many other responses than a captured, or at least subservient
regulator when it comes to the very elite in the business world. We have
discussed before the national importance of RBS and its ‘too big to fail’
characteristic, and regrettably regulatory capture often forms part of that
dynamic. This judicial review application could have massive consequences for
the regulatory framework in the UK, just as it is tasked with regulating a
marketplace that is entering particularly volatile waters.

Contributions are welcome to this blog. If you would like to contribute regarding any area of financial regulation, then please feel free to email me and submit your blog entry. The content should be concerned with financial regulation, and why it matters, but this is broadly defined. The blog is open to all who are professionally concerned with financial regulation, which may range from an Undergraduate Student interested in writing on the subject, to Professors and industry participants.